The Beginner’s uide to Social Trading · The Beginner’s uide to Social Trading investingintheweb.com Even if you’re just one of the many people who are copying the trades made

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The Beginner’s Guide to Social Trading

investingintheweb.com

Disclaimer

Social Trading involves risks, including loss of capital, even when following and/or copying or replicating top performing traders.

Always remember: do not invest money into online SocialTrading that you cannot afford to lose.

Past performance of a trader is not indicative of future results. When reviewing the portfolio or financial performance information,

opinions or views of a trader, you should not assume that the trader is unbiased, experienced, professional, independent or

qualified to provide financial information or advice. You should also note that the trader would have financial circumstances

and financial objectives, which differ from yours. You should not make any investment decision without first conducting your own

independent research and verification.

All content on this e-book is purely for information purposes and does not constitute

investment advice. We make no guarantees as to the accuracy or completeness of the content – it is subject to change, so please

conduct your own due diligence.

We hope that you enjoy this ebook and our website, and that you receive useful information that can help you make better informed

decisions and investments.

The Beginner’s Guide to Social Trading v1.1.0Copyright © 2020. All rights reserved.

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table of contentsThe Beginner’s Guide to Social Trading ...................................................... 04What is Social Trading? ................................................................................... 04History of Social Trading? .............................................................................. 05How You Can Benefit From Social Trading.................................................. 07Make A Living From Social Trading?............................................................. 09

Be Realistic .................................................................................................... 10Taking Advantage of Leverage ................................................................... 10How Much Money Can You Make From Social Trading? ......................... 13

Should I Copy Trade or Invest in a Fund? ................................................... 15Choosing A Broker ........................................................................................... 16

Regulation ..................................................................................................... 17Reputation and Customer Service ............................................................. 20Popularity and Quality of Traders .............................................................. 21

Social Trading Platforms ................................................................................ 22How Copy Trading Really Works ................................................................... 24What to Avoid in Social Trading ................................................................... 28Tips and Tricks for Success ............................................................................ 31

Start with a Demo Account ......................................................................... 31Risk Score ...................................................................................................... 32Number of Copiers ...................................................................................... 32Trading Data ................................................................................................. 33Past Trading History AKA “Closed Positions” ........................................... 34Open Positions ............................................................................................. 34Assets Under Management ........................................................................ 34Win Rate ........................................................................................................ 34Products and Markets Covered .................................................................. 35Account Currencies ...................................................................................... 36Ask Questions! .............................................................................................. 36

Final Word .......................................................................................................... 37


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The Beginner's Guide to Social Trading

‘Social trading’ is one of those buzz words brokers have been throwing around a lot over the past few years. It undeniably sounds like something fun, perhaps something easier, less technical, and not as lonely as traditional trading. And from the perspective of the broker, what better way is there to increase one’s client base than to merge the wildly popular con-cept of social media with trading?

In this guide, we will give you an inside look into what social trading really is. We will explain for you why it’s the broker that usually benefits the most from this type of trading, and why many independent traders end up losing…

However, we will also show you that there are ways for you to come out ahead of the crowd – and most importantly – ahead of your broker. We will reveal some of the tips and tricks for success, so that you instead can benefit from the possibilities that social tradingcreates, and come out as a consistently profitable trader.

What is social trading?

Before we move on, let’s first define what social trading really is. To start with, we can take a look at Wikipedia’s definition of the term:

“Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders and to follow their investment strategies using copy trading or mirror trading. Social trading requires little or no knowledge about financial markets, and has been described as a low-cost, sophisticated alter-native to traditional wealth managers by the World Economic Forum.”

Judging from this, we can see that social trading is essentially the merger of social media and trading in financial markets. It often allows traders to see and follow each other within the same social trading platform, while also setting up one’s account to automatically copy the trades made by other traders on the platform, so-called copy trading.

Further, Wikipedia’s introduction to the topic also says that social trading “requires little or no knowledge about financial markets.” And this is, to be frank, the top selling point forsocial trading. It’s a way for anyone without experience from finance, or without deep pock-ets to pay for a personal trading coach, to have a chance at making money from trading in any market, be it stocks, forex, commodities or crypto.


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You may have heard some people refer to “social trading” and “copy trading” as the same thing, and in this ebook you may also see the two terms used interchangeably at times. Strictly speaking, however, social trading is a general term that includes more than justcopying the trades of others, as we shall see soon.

Another thing to keep in mind is that some people in English-speaking countriesincorrectly tend to associate the word “social trading” with socially responsible investing or trading. However, this is wrong for the purposes of this ebook, and similarly wrong from the perspective of social trading brokers. To end the confusion, some brokers have instead adopted the term “copy trading” to refer to the same thing.

History of social trading

In the early days of retail trading – meaning independent traders who were most often trading from their computers at home – some traders figured out that they could earn some extra money on the side by letting others know which trades they made.

These people, known as signal providers, would then send out emails to their followers for each trade they made, and their followers would typically then log in to their computers and replicate the trade on their own platform.

However, the process had several problems associated with it. First and foremost was the lack of transparency in the process, a problem for followers. Who could know if the signal provider was just trying to lure them into buying a bad stock so that he could sell it for a higher price again immediately after?

In addition, by the time a follower had opened the email and had the time to place the trade on his own platform, quite some time would have passed. And for short-term traders, and particularly day traders, this essentially made it hopeless to rely on signals from others.

The earliest form of copy trading was, in other words, only useful for medium- to long-term traders.

As technology and the internet evolved further, however, online chat rooms started toappear all over the internet. This then opened up a more social environment for traders where both the signal provider and his followers could communicate more easily.


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Copy trading today is a fun and easy activity that anyone can take part in, regardless of how much or little money they may have in their bank account. Screenshot from eToro.

In 2005, the first company created a system to automatically replicate trades from professionals. This process was called mirror trading, and it solved the problems of having to manually replicate the trades, as well as the time gap problem. The trades were, just like a mirror, 100% replicated.

Following the mirror trading system came what we today still call copy trading. With this new system, those who chose to follow – or copy – other traders also got the ability to fine-tune settings on their own account to their preference, including things like adjusting the amount to be risked for each trade relative to the total account size.

Finally, the full social trading experience came along. As mentioned, some people refer tosocial trading as the same as copy trading. In reality, however, it encompasses quite a bit more, including concepts like sentiment analysis or the ability to communicate, similar to another social media platform.

Sometimes, social trading platforms will show you which assets are popular amongtraders on the same platform at any given time, and which are unpopular. Often referred to as “crowd trading,” this information can be used either to take advantage of momentum in certain assets, and sometimes even used as a contrarian indicator, meaning you can try to take the opposite approach of the masses in the market.


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We consider social trading to be a new level in the evolution of trading and technology, where all relevant data about a trader can be looked up and studied. Just like social media networks like Facebook, the information you can expect to find should include the trader’s identity, and the platform should be open for discussions between the users.

By using a full-featured social trading platform, you’ll have all the information you need about a certain trader and his past performance, you can communicate with him, and you can decide whether or not you want to follow him based on the information available.

How YOU can benefit from social trading

As you have now seen, social trading allows individual users without much experience from the markets to benefit from knowledge accumulated over years and decades by moreexperienced traders.

It’s a fact that the new concept of social trading is already disrupting the world of financial markets. Millions of ordinary people are right now being connected with each other,essentially giving anyone the potential to become their own hedge fund manager if they so choose.

And the great thing is that in social trading, nobody could care less which school you went to, who you know on Wall Street, or how good you are at convincing others that you’re right. Instead, the ONLY thing that matters is results. And if you’re good at what you do, nothing can stop you from rising to the top in this new world!

As a copy trader, you are your own boss, and can essentially act as a mini hedge fund by outsourcing your money management to several well-experienced traders. Screenshot from eToro.



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Even if you’re just one of the many people who are copying the trades made by others on social trading platforms, the whole experience is perhaps one of the best ways to learn more about how financial markets work, and how you can make money from them.

In fact, mastering copy trading can allow you to get a better understanding of the markets, while at the same time get a return on your investments, and acquire your own base of followers if that is of interest to you.

In addition, social trading also opens up even more opportunities for traders that previously didn’t exist. Among these benefits are:

• Diversification by copying many different traders at the same time, thus getting exposure to a variety of trading strategies.

• Taking advantage of the wisdom of the crowd. Remember, the market is nothing more than the sum of the actions of everyone who participates in it.

• Massive potential for time-saving compared to traditional trading, which requires constant attention to the market.

ACTION ITEMS

1. Think about whether or not you have the experience required to find good trading and investment opportunities on your own. If you still believe you need more experience before placing trades on your own, then copy trading could be a good option for you.

2. Take some time to understand how diversification in copy trading works. In general, risk can be greatly reduced by finding multiple traders to follow who:

a. Use a variety of trading strategies; b. Specialize in different markets, and; c. Hold their trades for different time horizons

3. A good rule of thumb is to copy between 5 and 10 traders to be properly diversified.


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Make a living from social trading?

When it comes to trading, people are usually dying to know how much money they can expect to make. After all, we all depend on money to make our lives work. And the general rule here is that the more money we can make from something, the better that something must be!

With social trading, you can make money in two ways. You can either share your trades with others, and then receive some commission from your followers for letting them copy your trades. Or you can find a good trader to follow, and then copy the trades he makes, which is far more common.

In this ebook, we will focus on how you can make money by copying others.

In theory, social trading is simple, and works like this:

If you have done proper research and found a trader who has been consistently profitable over a certain period of time, you can expect that he will continue to make similar profits in the future too.

So, is it possible to make a living by being a copy trader? Well, it all depends on a few important factors:

• How much capital do you have available to trade with? Small amounts of capital will usually not be enough to be able to make a living, but a larger amount will certainly help.

• How much risk are you willing to accept? Generally, the higher risk you can tolerate, the higher the profit potential is.

• How disciplined are you? In social trading, as in all other forms of trading, it’s essential that you’re able to stay focused and don’t get easily influenced by emotions. If you get greedy, chances increase that you will make mistakes. Similarly, if you get scared, you’re also likely to sell at the worst possible time. Instead, what every successful trader does is to first develop a plan for the trading, and then follow that plan to the point.


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be realistic

So, now that you know that the question of how much money you can make from social trading is not as straightforward as it seems, let’s try to answer it in the best way we can.

The truth is that yes, you can make a living from social trading. However, if you don’t have much money to start with, it’s going to be difficult. It’s therefore prudent to be realistic and not expect instant riches.

You’ve certainly seen people online bragging about the returns they make from copy trading. People throw around numbers like anywhere from 100% to 1,000% per year. And sure, some people may have been lucky and made those kinds of returns for a few months, and if they extrapolate their returns over a year it may come out at a few hundred percent. However, how likely is that to happen in the real world?

The truth is that trading is easy over the SHORT-TERM. Anyone can get lucky and show fantastic returns over a few weeks or months. And when they then show those returns to new traders on social trading platforms, many unsuspecting traders decide to get on the train and let this seemingly genius trader make trades on their behalf.

Over the LONG-TERM, however, trading is far from easy. In fact, it is incredibly difficult to generate even low double-digit returns consistently over many years.

In reality, even the most famous investors in the world, such as the legendary stock investor Warren Buffet, has only generated about 20% per year on average since starting his career in 1965. And still, he is now a billionaire and widely considered “the world’s greatest investor.”

Now, We don’t mean to disappoint you and make you think that trading is impossible. Because it absolutely isn’t. But it’ll undeniably serve you well to start out with some realism. Remember that story of the rabbit and turtle race? As often happens, slow and steady wins the race over the long-term.

taking advantage of leverage

In copy trading, as well as in traditional CFD and forex trading, there is one major advantage available that can make a huge difference for ordinary people without much capital; leverage.


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What leverage in trading means is that you essentially borrow money from your broker so that you can take bigger positions in the market than your account size would normally allow for (if you were trading unleveraged instruments).

Often confused with margin, the two terms actually refer to two sides of the same concept. While leverage is the amplifier the broker offers you, the margin is the amount of capital you will need in your account in order to take a certain position in the market.

For example, typical leverage in Europe (here meaning all EU and EEA countries) is 1:30 for major currency pairs you might trade. This means that for every € 1 in your account, you can take positions in the market worth € 30. The margin required for taking a € 30 position is therefore just € 1.

Let’s take a look at a few more examples of leverage can mean for you as a trader in monetary terms:

As you can see, leverage offers amazing opportunities for ordinary traders without huge bankrolls to actually make some good profits from copy trading.

Invested Amount Leverage Trade Size€ 50 1:20 € 1000€ 200 1:30 € 6000€ 400 1:10 € 4000

When picking your own trades (not copy trading) on eToro, you can choose the amount of leverage you want. For a stock like Apple, the available leverage ranges from

X1 (no leverage) to X10 leverage. Screenshot from eToro.



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For other assets, however, the amount of leverage you can get is lower than that. As of 2020, the maximum allowed leverage in Europe is:

• 1:30 for major currency pairs (i.e. EUR/USD)

• 1:20 for non-major currency pairs (i.e. NZD/USD), gold, and the biggest stock indices

• 1:10 for commodities (other than gold) and smaller stock indices

• 1:5 for single stock CFDs

• 1:2 for cryptocurrency CFDs

As we shall see later, however, the amount of leverage you can get varies quite a bit from broker to broker and from country to country.

While in Europe, the maximum allowed leverage for major currency pairs is just 1:30, other parts of the world have different rules. Sometimes, leverage can go much higher than the 1:30 that European traders are used to, and in some cases all the way up to 1:500 and beyond. However, with an amount of leverage like this, discipline becomes extremely important, and without experience and a highly rigid risk management system, you arelikely to lose all the money in your account sooner or later.

You’ll read more details on the leverage rules found in other parts of the world in the section on regulation later.

Now, when it comes to copy trading specifically, you are essentially giving up control of leverage, and thus some of the control over your risk level, to the trader(s) you decide to copy.

While some traders choose to only make unleveraged trades, others use the maximum allowed leverage, dramatically increasing both the profit potential and the risk.

In short, leverage allows you to:

• Take bigger positions in the market than your account size would otherwise allow for

• Get meaningful profits (and losses!) even with just a small account

• Only put up a small amount of capital for each trade (the margin)


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How much money can you make from social trading?

The question of how much money you can make from copying other traders on social trading platforms is interesting, and it’s something that a lot of people are wondering.

So, let’s be very clear about this: The answer is that you can make good money from social trading, and you could even make a living from it if that’s what you aim for. However, most people will not reach that level, and the more realistic approach in the short term is therefore to treat your copy trading income more like a side income than a total replacement of your current full-time income.

Let’s take a look at some numbers to help you understand the earnings potential in copy trading.

Below you can see the return profile for one trader on the popular social trading platform eToro over one year. As you’ve probably noticed, his returns have varied quite a bit, from slightly positive in the first five months of the year, to much more profitable in the second half of the year. Additionally, this trader also had one month of negative returns, which is not uncommon in trading.

Screenshot from eToro.



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And here are the exact corresponding returns for each month:

As you can see if you add up all the numbers, this trader’s total profit for the year was 31%. And among all the months, only August resulted in double-digit returns of more than 10%. For all the other months, returns mostly ranged between 0 and 5%.

Now, what this means is that if you had copied this trader with € 1,000 from your account, you would have made between € 0 and € 40 per month. Over the entire year, you would make € 310, given this trader’s annual return of 31%.

Could you live off of that? Well, probably not. But what you can do, however, is to start small and let your trading account grow organically year after year. And who knows, maybe one day you will have an account size large enough to make a living from?

Below are a few more examples to help you get an idea of what different account sizes can mean in terms of your profit potential:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

+0.5% +0.1% +0.4% +1.2% +0.1% +6.1% +3.7% +11.2% +5.5% +1.9% -3% +3.3%

Copy Amount % Return Annual Profit€ 1,000 30% € 300€ 5,000 30% € 1,500€ 10,000 30% € 3,000€ 100,000 30% € 30,000

ACTION ITEMS

1. Think about how much money you need to earn every year to achieve your goals.

2. Calculate how much you would need to allocate to a trader with a 10-30% annual return to achieve that amount. Realize that like in any business, you need to start slowly and then build your account bigger over time.

3. Open an account with one of the big social trading brokers and browse the traders that can be copied on the platform. What’s a typical annual return among the most popular traders there? Do the returns match your expectations?


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Should I copy trade or invest in a fund?

One of the best comparisons with social trading is an investment fund. The reason for that is because you’re basically getting the same thing whether you choose to copy another trader or give your money to a fund manager to let him invest on your behalf. In both cases, you’re giving up control over your money temporarily to someone you believe will do a better job than yourself at earning returns on your behalf.

A major benefit of copy trading compared to traditional investments in mutual funds and hedge funds, however, is that the entire process tends to be a lot more transparent in copy trading. And with recent innovations from some social trading brokers like eToro, it’s even possible to copy pre-designed portfolios that mimics actual investment funds.

As a copy trader, you get to see the exact trades that your chosen “expert trader” makes, and you can choose to stop copying him and withdraw your funds at any time. Try that with a traditional investment fund, and you’ll see that it takes a couple of days for your request to go through, unless you’re bound by certain lock-in rules, which of course would complicate things further.

In any case, the market price may have already changed dramatically compared to what you expected by the time you finally manage to sell your fund holdings.

On eToro’s popular social trading platform, it’s now even possible to invest directly inpre-desgined portfolios.


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As a copy trader, you essentially get the luxury of having many different fund managers that you can invest money with. And even better, you are free to move money between them at any time depending on their performance. And it all happens with unmatched speed, transparency, and even at a very low cost.

choosing a broker

One of the most important decisions you make when you venture into social trading is which broker to choose. And there are indeed a large number of social trading brokers out there. Some are based in and regulated Europe, while a much larger number of brokers are operating from various locations offshore, with limited transparency and little or no government oversight.

For traders who prefer to sign up with one of the more reputable providers in Europe or other top tier jurisdictions, however, there are a number of strong brand names to choose from. Among the biggest and most popular social trading brokers that are regulated in Europe – and which we have thoroughly reviewed on Investing in the Web – are:

• eToro• Naga• Darwinex

• Ayondo• FXTM

At Investing in the Web, we have thoroughly reviewed a number of the top socialtrading brokers and platforms. Full comparison table is available here.


https://investingintheweb.com/social-trading-platforms-comparison/

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Now, you may wonder why choosing a broker is so important. Aren’t they all essentially just doing the same thing? Well, unfortunately it’s not that simple.

The reason why this is so important is because there are significant differences between the various brokers in the market. Let’s therefore go through some of the factors you should consider when choosing a broker. A bit later in this guide, we’ll also reveal a few things that you should be extra cautious about to avoid getting ripped off as a new trader.

First and foremost, it’s important to consider the country – often called the jurisdiction – that the broker is based in. The reason for this is that the country where the broker is based is also responsible for regulating the broker, meaning to determine the rules that the broker must play by.

regulation

Where your broker is based – and thus regulated – matters a whole lot.

As you will likely find out over time, brokers in certain countries tend to offer trading conditions that are seemingly better than brokers in other countries, such as a higher amount of trading leverage.

Brokers based in for example the European Union (EU) has imposed strict limits on the amount of leverage they can offer, limiting this to a maximum of 1:30 on popular trading instruments such as the euro/US dollar currency pair. This was not always the case, however, but was introduced with new regulations from the EU’s financial regulator known as the ESMA in 2017.

If, on the other hand, you go to a broker based in Australia or an offshore jurisdiction, you’ll find that this leverage can go as high as 1:500, and sometimes even higher.

There is, in other words, a huge difference in the amount of leverage you can get depending on the jurisdiction the broker is in.

Now, it’s important to note that even though it may be tempting to take advantage of the weaker regulations in other countries, you should not simply jump onboard with a new broker based on the amount of leverage it offers you.


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In fact, doing that is incredibly dangerous, and you may even end up being scammed by a broker that takes your money and runs away. And if the broker is based in some offshore jurisdiction with very weak or even non-existent regulations, there may be very little you can do to get your money back.

In regions like the EU & UK, North America, Australia, New Zealand, and Japan, you can usually rest assured that the broker is reliable, as long as it’s obvious that it is regulated locally within the country.

In other parts of the world, however, practices vary widely from literally no regulation and oversight in many small – but very popular – island nations such as Saint Vincent and the Grenadines, the Marshall Islands, and the Seychelles, to reasonably good oversight in countries like Singapore, Hong Kong, Switzerland, and South Africa.

What you should also know about these jurisdictions is that the small offshore countries that don’t regulate brokers at all are in fact popular countries for social trading brokers to incorporate in. You should therefore not be surprised to find out that a broker has an office in one of those countries, but you should definitely consider your options carefully before you deposit money with one of those brokers.

Sometimes, you’ll also find that the broker in fact has offices in many different countries, which is something that complicates the issue of how it is regulated. The way it works in these cases is that you’ll automatically be assigned to the entity of the broker that is responsible for the jurisdiction you are a resident of.

If that sounds complicated, please bear with us for a little bit longer. Because of all the different rules around the world, the issue of forex broker regulations has unfortunately developed into quite a complex issue.

The FCA (UK), FINMA (Switzerland) and ASIC (Australia) are among the most important regulatory agencies that oversee the social trading and forex broker industry.


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Let’s look at some examples to help you understand which regulations you – and your broker – will be subject to:

• If you live in an EU or EEA country, you’ll be assigned to the EU-based entity of the broker*. As a result, you’ll be subject to the strict EU regulations which limits trading leverage to 1:30.

• If you live in Australia or Japan you will usually be assigned to the entity of the broker based in your own country.

• If you live in the US or Canada, you will usually only be able to sign up with a social trading broker that has a presence in your country.

• If you live in other countries than the above, you will usually have few problems in choosing the broker that suits you, and you will usually be assigned to the offshore-based entity of the broker where regulations can be weak but trading leverage high.

*Some brokers circumvent these rules and allow their EU-based clients to sign up with their offshore entity. However, the legality of this practice is questionable.

Lastly, if you’re unsure of whether the broker you are considering to sign up with is regulated or not, all you need to do is usually just to scroll down to the bottom of their website. Using the social trading broker Ayondo as an example this time, we can see the following at the bottom of their site:

Screenshot from Ayondo.

These are two key pieces of information that proves to us that the broker is most likely regulated. First, we can see that the broker states clearly that “75.9% of retail investor accounts lose money” (this is, by the way, not necessarily the case for copy traders, since you then choose to copy only the best traders on the platform…)

As you can probably imagine, no broker would say that most clients lose money unless they were required to do it by the regulator. And that regulator, in this case, is the UK’s very reputable Financial Conduct Authority (FCA), as seen in the second red rectangle.


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reputation and customer service

Another factor that is important to take into consideration when choosing a broker is the broker’s reputation among traders. You may want to do a few Google searches to research other people’s experience with the broker before deciding to go for it.

Keep in mind when researching a broker, however, that there will always be some people who have had bad experiences with a certain broker. In fact, only positive feedback makes things look even more suspicious, because that is simply not realistic. There are mixed opinions about all brokers, but for some brokers it’s easier to tell that something is obviously not good than it is with others.

Another thing you may want to consider is to take a look at some professional reviews of the broker. There are literally a ton of websites out there that do these types reviews, but bear in mind that most of them are not very good, nor should they be trusted.

Many review sites have special deals set up with particular brokers, and will receive extra commissions from a broker for recommending that particular broker over another broker. Therefore, it’s always good to be critical of what you read in reviews, and to verify the information yourself.

At Investing in the Web, we have also reviewed a number of brokers. However, we always strive to keep ourselves to the highest professional standards in what we do, and only provide neutral and fact-based reviews of social trading brokers. We can therefore assure you that no broker will get any preferential treatment from us, and that our reviews will be honest and factual.

Further, it almost cannot be emphasized enough how important customer service is for the user experience of a social trading broker. And this naturally ties in with the reputation of the broker, since customer service – or rather the lack thereof – is one of the most common complaints traders have about their broker.

A social trading broker should be easy to get a hold of when you need it, and they should be helpful in addressing any kind of concern you may have. A working customer service phone number within the EU, preferably open 24 hours on trading days, and a live chat option with responsive support agents, is a minimum in our opinion.


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popularity and quality of traders

Another thing that is especially important with social trading brokers is to look at how popular the broker is. In general, the more users trade on a social trading platform, the better it is for you, as it provides you with more options on who to copy and what risk profile you are comfortable with.

This is not as important if you’re a traditional trader who is not planning to try out copy trading anyway. For copy trading purposes, however, you’ll definitely want to have a fairly large user base to make it worthwhile to join a new broker.

But the number of users is not everything. You’ll also want to make sure that the users on the broker’s platform – especially those who share their trades with others – are what we can call “quality traders.”

Keep in mind that there are many inexperienced traders out there who are simply trying to earn some extra money on the side by sharing their trades with others.

Some of these will inevitably end up getting lucky with their results for a few weeks or even months, and thus end with a track record that looks impressive despite their lack of experience. However, the results may very well come from them taking huge risks that are hidden to you as a copy trader, until their trading eventually fails and all profits are lost.This is why you should focus your efforts on finding experienced traders who build slow and steady profits over time rather than massive profits over just a short period of time.

ACTION ITEMS

1. Select one or more of the brokers we have reviewed on Investing in the Web.

2. What are the account types offered by this broker, and what are the minimum deposit requirements for each account type?

3. Browse through the traders you can copy on the broker’s platform. Try to get an idea of the quality of the traders.

4. Is the broker regulated in a reputable country or region such as the EU?

5. Are the assets that you are interested in trading offered by the broker? For example, some brokers don’t offer trading in single stocks, while others don’t offer any commodities.


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social trading platforms

One problem for many new traders who want to get into copy trading is to differentiate between a platform, a broker, and a social trading network. Fortunately, this is not as difficult as it seems.

In most cases, the broker is the company you sign up with, create an account with, and deposit money with. It is also the broker that decides your trading conditions (spreads, conditions, leverage, etc.), and that is regulated by the government.

In turn, all social trading brokers offer one or more software platforms that their clients can use to make trades and to copy other traders. And this is where the social features all come in, with the ability to interact between users and see statistics about other traders you can choose to copy.

Lastly, the term network is sometimes used interchangeably with the platform. Strictly speaking, however, the network refers to the community of traders that are active on a particular platform. As we have mentioned earlier, it can be a great advantage for you as a copy trader to have a large network, as that translates into better opportunities to find good traders to copy.

As you can probably imagine, there are a variety of social trading platforms available on the market. Some of these platforms are developed exclusively for one broker, while others are generic, or sometimes so-called “white-label” platforms that are used by a number of brokers, although they are often branded as their own.

In any case, you’ll have to use a trading platform that your chosen broker supports.

So, whether you choose the broker based on the platforms they offer, or choose platform first and then find out which broker supports it, is of course up to you. Just be prepared that your broker will most likely not support a new platform just because that’s a platform you want to use. Most brokers don’t operate in this way.


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With the huge progress that have been made in technology over the past few years, it should be no surprise that trading platforms have also evolved from the extremely complex pieces of software that they used to be.

Now, even the most simplistic social trading platform is in fact far more capable at gathering data and presenting it in an easy-to-understand way than complicated professional platforms were back in the early days of trading. As a result, trading from home is also something that has surged in popularity, as it has become both more accessible and much more intuitive.

The popular broker Naga offers its clients the choice between either the MetaTrader 4 (MT4), MetaTrader 5 (MT5) or its own proprietary platform. However, copy trading is only supported on

the broker’s own Naga platform. Some brokers also support copy trading on MT4/5,through a software add-on.

eToro’s own copy trading platform is very simple to use for copy traders, but still powerful enough for even advanced traders, who use it to share their trades with others. The platform is available

for web, tablets, and smartphones. Screenshot from eToro.



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Since many social trading platforms have developed to become simplistic in a bid to attract new and inexperienced traders, however, it’s important that you consider which features the platform has to offer. Because while a simplistic platform can lower the barrier to entry for new traders, it may not be the best solution for you in the long run.

In reality, it is – after all – essential to learn and use a variety of different trading tools in order to be a successful trader.

When choosing a social trading platform, there are a few factors you should pay special attention to. Among these are:

• The security of the platform.

• Transparency in details about the traders you can copy. In general, you should be able to understand, analyze and assess their strategies, style and track record. The more information, the better.

• Technical performance and reliability of the platform.

• Are there any platform-specific fees charged, including subscription fees for using the platform?

• How is the platform’s user interface and user experience? Some rather old trading platforms are still popular among traders today, but they aren’t overly user friendly. Find out what works for you.

• Is the platform also offered as a mobile app so you can place trades or check your performance while on the go?

how copy trading really works

Now that we’ve gone into great detail on the various social trading brokers and platforms that exist, it’s time to take a closer look at how this type of trading is actually done.

The first thing to do once you have signed up as a new trader on a broker’s social trading platform is of course to start to familiarize yourself with the platform.


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On eToro, you’ll find the list of people who share their trades when you click on the button called “Copy People” in the menu on the left. You’ll then find a list of all the people available to copy, organized into different categories such as “Trending,” “Most Copied,” “Editor’s Choice,” and so on.

Once you’ve found a trader that you want to copy, most platforms will have a button that simply says “COPY” or something similar. Clicking this button should then allow you to decide the amount or share of your trading account that you want to allocate to the trader, as well as whether you’d like to copy trades that are already open.

On the last issue of whether you should copy open trades, it may be a good idea to see what the trader you are copying have to say about it. Some recommend doing it, while others advise against it. Speaking from a traditional trading standpoint, however, the best option is probably to not copy trades that are already open, as the risk:reward profile on those positions will then most likely have changed by the time you get into the trade.

Remember, if the reasons for entering a trade are no longer valid, you should not enter it – regardless of what other people may be doing.




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In addition, another important factor here is to remember to set an appropriate stop-loss level for each trader you decide to copy. eToro and several other copy trading platforms lets you do this intuitively by choosing the how much you are willing to lose at the most. In the example below, the order window indicates you’re willing to lose $80 dollars on this particular trader ($200 - $120 = $80).

Finally, once the trader you’ve copied opens a new trade, you’ll be able to see it instantly in your account, with a delay of just milliseconds. The trade on your account will then have been opened proportionally to the amount you’ve allocated to that trader.

Instead of copying other traders, however, it’s also possible to add some to your watchlist and observe their activity and performance for some time before deciding to allocate any real money to copy him or her. On eToro, that can be done by first clicking on the trader’s name to open his profile, and then clicking on the small button to the left of the “COPY” button.

On eToro, you simply choose the total amount you would like to allocate to each trader you copy. Consider unchecking the “Copy Open Trades” box, and keep in mind that on eToro, $200 is the minimum amount you can copy someone with. Also remember to set a stop-loss level you are

comfortable with for each trader you copy. Screenshot from eToro.



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Here’s an example of how your copy trading could work out with a € 1,000 account:

1. You fund your account with € 1,000 and you’ve found a trader you want to copy.

2. You choose to copy him or her with 10% of your capital, which is € 100.

3. Let’s say the trader you choose to copy has a € 10,000 trading account, and decides to make a trade with 5% of his capital (€ 500). Your own position will then be 5% of the amount you’ve allocated to that trader (5% x € 100 = € 5).

4. f the trade is successful and the trader earns 10%, you will also earn 10% of the amount. The same of course also happens if the trade results in a loss.

As you can see, you won’t get immediate massive profits that you can live off of unless you have quite a sizeable account. However, the good news is that most brokers these days don’t charge commissions for their social traders, which means that you can learn from your own experience while profiting along the way until you eventually reach an account that is big enough to make a living from.

eToro and other platforms also allows you to add a trader to your watchlist so you can observe his trading performance for some time before choosing to copy him with your own money.




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what to avoid in social trading

Although following the advice we’ve given so far will get you a long way in social trading, there are still some pitfalls that you should be aware of, especially as a new trader. Let’s look at some of these here:

First of all, it’s important to realize that not everyone who shares their trades on social trading platforms are honest and trustworthy people. Just like everywhere else in the world, you’ll find people who try to “game the system.”

These people will figure out creative ways to boost their rankings through questionable actions, like manually copying the activity of other good traders, or creating multiple accounts and then sticking with the one that, by chance, ended up with the best performance.

Because of this, attention to detail is crucial, even as a copy trader. Just superficially reading through the trader’s details, or choosing the most followed traders, will most likely make you lose money!

Another important thing you should not forget is that past performance is not necessarily indicative of future performance, and that’s why there are no guarantees in trading. The same is true for social trading.

Your goal as a social trader therefore becomes to figure out which of the traders you can follow have the highest probability to continue producing profits in the future. And to do this, slow and steady is far better than huge profits in a short time, since the latter almost always involves huge risk that will inevitably lead to large losses.

You’ll also want to avoid following a trader who “doubles down” every time he loses. This particular strategy – which is also used by some gamblers in casinos – is called the Martingale method. In theory, the strategy says that if you double your bet every time you lose, you’ll eventually experience a winning trade, which then will more than compensate for all the losing ones.

The strategy sounds tempting for inexperienced traders, but in reality, it can lead to very dangerous situations that causes you to lose your entire bankroll. The reason why it’s so dangerous is because you never know how many losing trades you will make in a row. As a result, your entire bank account may get wiped out before you hit that winning trade – and then it will be too late.


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It’s also important to carefully study the performance chart of the trader you want to copy, often called the equity curve. What you are looking for is someone with a steady smooth increase in their capital, with only small drawdowns and an overall uptrend. The numbers should of course also be consistent with the graph you see. Again, slow and steady is far better than fast and erratic returns.

Related to the past performance of the trader you want to copy is also the question of how often he or she makes trades. In very general terms, we can say that it’s better to follow someone who makes many trades than it is to follow someone who makes very few trades.

The reason for this is that you need a certain number of trades to see if the trader’s strategy actually has a positive expectancy in the market. With only a few trades, a good performance may come down to luck, but over a large number of trades it becomes far more likely that he has a statistical advantage.

With that said, however, you’ll also want to make sure you don’t copy a “hyperactive” trader. With too frequent trading, spreads and slippage (the difference between the price you expected you would get and the price you actually got) can easily eat away your profits.

A smooth equity curve without large drawdowns is more important that fast growth (which also tends to lead to fast losses). This eToro trader has an equity curve that looks pretty attractive in

our view. Screenshot from eToro.


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Although finding and copying good traders with a steady track record will get you a long way, it’s also important not to get too “exposed” to a single trader, especially if he presents a high-risk strategy. Instead, diversify and choose traders who operate in different markets and use different strategies. This way, your drawdowns will be smaller and your overall performance much smoother.

Lastly, we would also like to stress that you should definitely avoid copying a trader who doesn’t close his losing positions. This is a known strategy that some traders use to make their stats look better, but it is a dangerous strategy. By not closing a losing trade, there is of course a chance that it will rebound and eventually end up as a winning trade. However, there’s also a chance that it doesn’t happen, and thus drag your returns further and further into negative territory.

For this reason, not closing a losing trade by for example widening a stop-loss order should be avoided at all cost. If you suspect that a trader is doing this, you can often check it in the trader’s Portfolio tab, where records of old losing positions are kept.

avoid the following when starting out with social trading

1. Don’t fall victim to “black hat” social traders who use questionable techniques to make his performance stand out.

2. Don’t assume past results automatically will translate into future results.

3. Don’t trust traders using the Martingale method.

4. Avoid following traders with very volatile equity curves.

5. Avoid following traders who rarely place trades.

6. Don’t rely exclusively on a single trader.

7. Avoid traders who don’t abide by their stop-loss levels.


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tips and tricks for success

Now that you know of – and hopefully understand – all the things you shouldn’t do as you start out as a new social trader, you actually have a better starting point than maybe 90% of other traders.

The thing is that if you manage to follow these rules in your daily trading, you don’t have to make the same mistakes yourself as countless other traders have made before you. As you’ve probably heard, it’s common for people to say that they like to learn from their mistakes. However, an even better strategy is to learn from other people’s mistakes so you don’t have to make the same ones.

That’s one of the key takeaways we want you to get from this book.

So, what are the things you should do then as you start out on your new trading journey?

Let’s look more closely at some of those tips & tricks here:

start with a demo account

The first, and probably most important, thing we would like to mention here is that there’s absolutely no need to jump into copy trading with a large amount of real money right from the start. Instead, start by signing up with a demo account where you can practice your skills with virtual money!

Although a demo account doesn’t offer the real experience in terms of the emotional and psychological impact that we know trading has, it’s still valuable for several reasons.

Firstly, you should use a demo account to familiarize yourself with the social trading platform. Learn how everything works, and especially how you place trades or correctly copy someone, while choosing the copy amount, stop-loss level, and so on.

Secondly, the demo account is also a great tool for evaluating the traders you are considering to copy with your real money. Try them out on the demo for a month or two first. Are their returns living up to their past returns? If yes, that’s great, but if no, try to find out why their trading performances have gone down.


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risk score

Whether you are on a demo account or a live account, there are certain technicalities associated with copy trading that you should get to know. One of these is the so-called Risk Score, which is calculated by most social trading platforms on a scale from 0 to 10. What you want to do is to look for traders with consistent risks scores that do not change much over time. In addition to having a consistent risk score, however, the score should also ideally be as low as possible, while still ensuring you get the results you want.

As always in investing and trading, there is an inverse relationship between risk and expected returns. If you ask us, however, we’d recommend choosing a risk level between 0 to 5, depending on how conservative you want to be in your approach.

number of copiers

Generally, if a trader has very few others who copy and follow him, it’s a bad sign, and you should avoid him. However, that doesn’t mean that the most copied traders necessarily are good traders. Many users decide to copy them just because they are “top traders”, have very high returns, or have a very “salesy” profile picture and description.

Also, remember to watch out for the “black hat” techniques used by some traders that we discussed in the “What to avoid” section.




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trading data

Try to read and understand the data. Understand the history behind that trader’s activity, as well as the strategies he is using and any particular changes. You should go with a trader with consistent and solid results.

A logical extension of this is also to avoid traders with large drawdowns, as we mentioned in the previous chapter. For example, let’s say a trader starts with € 10,000. Then his portfolio increases to € 10,100, drops to € 9,900, and then goes up again to € 10,000.

The drawdown in this case is equal to (10,100 - 9,900) / 10,100 = 2%.

The drawdown is a percentage loss that represents the maximum cumulative loss that a trader has experienced in his portfolio. A trader with a low drawdown percentage helps you make sure that any loss is not going to last long, before the gains come. This is indeed one of the most important characteristics of any good trader.

Avoid copying traders with large drawdowns in their equity, such as this one. Screenshot from eToro.

As a general rule of thumb, you should look for traders with daily drawdowns of less than 4% or weekly drawdowns less than 10%. In any case you will be better off by avoiding copying traders with drawdowns larger than 15 to 20%.



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past trading history aka. “closed positions”

Make sure to look at a trader’s past trading history, also called “Closed Positions” on some social trading platforms, before you choose to copy a trader. In which markets and products has he been active? Which strategies is he using? Is the trader risking a large portion of his account on each trade? What are the gains and losses of each trade?

Try to assess the trader’s closed positions to get a better idea of his strategy. For example: “Trader X is investing mainly in stocks, mainly Tesla, operating short-term, and looking for small but safe profits in each operation”.

open positions

It is a known fact that some traders keep losing positions open so that it doesn’t affect their statistics (when the statistics only shows data of closed trades). Therefore, make sure you check a trader’s open positions and, if there are a lot of trades that are in the red from weeks or even months ago, this can be a bad sign.

However, this can also be due to market conditions and/or having a longer-term trading strategy (in this case, you should see both losses and gains, less frequent trades, and it should be consistent with the average holding time). What this means is that if their average holding time is consistent with the holding time of his losing open positions, it can just be due to market conditions and not an attempt to manipulate the statistics.

asset under management

This represents the total money that the trader is actually “managing” on behalf of all the people who copy him. A high value generally means that people are trusting this trader with a lot of money, which under normal circumstances should be a good sign.

win rate

You should ideally look for traders to copy who have a win rate on their trades of more than 50% of all the trades he makes. However, very high win rates in the range between 70 and 100% should also make you a bit more suspicious, as this may be because the trader is keeping losing positions open – a recipe for disaster. Always double check if something seems too good to be true.


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Along with a win rate of more than 50%, it’s also a great sign if you can see that the trader produces positive returns in at least 50% of all weeks. That way, you will have a much easier time coping with the drawdowns and the psychological effects of losing money from time to time.

products and markets covered

No trader can master all markets, like forex, stocks, indexes, and cryptos, all at once. Mastering one of them, however, is considerably easier.

As a result of this fact, you may want to look for someone who specializes in a few markets or products only. Of course, they can make some trades in other areas to diversify, but the bulk should be in the markets and products in which the trader is specialized.

Also, you may want to look for traders with complementary specializations in order to further diversify your portfolio. This could for example be one trader who specializes in forex and another one who specializes in stocks.

Some social trading platforms, such as eToro’s, has a neat filter function that lets you search for traders to copy based on special parameters. Here, you can easily find traders who specialize in different markets by searching according to “Allocation.”

By going to the “Stats” section on a trader’s profile on eToro, you can see the percentage of his trades that are profitable, aka. the win rate. Screenshot from eToro.



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Additionally, it’s generally better to follow traders who mainly trade in markets with good liquidity. The main reason for this is not actually the liquidity, which in almost all cases is good enough for retail traders anyway, but because the most liquid markets also have the tightest spreads and the best pricing. In copy trading, as in all other forms of trading, wide spreads are really harmful to your overall returns and must therefore be avoided.

account currencies

Unfortunately for many European traders, most social trading brokers denominate their clients’ accounts in USD only, and automatically convert any other currencies into USD upon deposit. This means that you will pay significant currency conversion fees.

One way to avoid these fees is to convert your currency through free currency conversion services like Revolut or TransferWise, and then go on to transfer your trading capital in US dollars directly to the broker.

ask questions!

Still not sure if a trader is a good choice for you? Want to learn more about the trader’s activity and if he is a good fit for you? Just ask him! Most traders are open for discussion and will reply to your questions, and many in fact love to talk about their trading.

eToro lets users search for traders to copy depending on which assetsthey have allocated capital to. Screenshot from eToro.



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final word

If you made it this far in the Beginner’s Guide to Social Trading, there’s only one thing to say: Congratulations! You are now better prepared at tackling the challenges that the market will throw at you than 90% of other people who jump into copy trading or social trading head first without knowing what to expect.

After reading through this ebook, you’re probably fully aware that trading is in fact difficult. And despite how easy copy trading sounds, even this form of trading is difficult to do profitably over time. If it wasn’t, don’t you think everyone would have just quit their jobs and become copy traders by now? After all, this new evolution in trading has already been around for a few years.

In other words, the truth is that yes, copy trading can be difficult to do profitably over time, but with a good strategy, good risk management, and a broker that offer your favorable terms – especially a tight spread on the instruments you trade – there is hope!

Smart and creative traders have always been able to extract profits out of the markets, and as long as we have markets, this will continue.

The only question is, will you be one of them?

What do you think about this e-book? We’d love to hear from you and improve our content based on your feed-

back. Let us know by reaching out to us here.

- The Investing in the Web Team


https://investingintheweb.com/contact/

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The Beginner’s uide to Social Trading · The Beginner’s uide to Social Trading investingintheweb.com Even if you’re just one of the many people who are copying the trades made